Modest expectations for UBS

A late flurry of corporate activity transformed an ordinary 2010 for Australia’s investment bankers into a fount of optimism about the prospects for 2011.

But Australia’s top-earning bank is keeping a lid on expectations.

UBS topped the league tables for advice on equity raisings in Australia last year, getting involved in $8 billion of deals, according to Dealogic.

It also dominated the merger and acquisitions space, where it advised on $59 billion of transactions, including AMP’s acquisition of AXA Asia Pacific and the Singapore exchange’s proposed takeover of ASX Ltd.

Still, UBS Australia chief executive Matthew Grounds is not getting ahead of himself, forecasting a solid, if not spectacular, year in 2011. “I think we will get some increase in equity volumes," he told The Australian Financial Review.

“In terms of M&A, I expect it will be concentrated in the energy and resources areas. I think, if the Australian market is stable, you will start to see [initial public offerings] coming out, which is a good thing."

If Mr Grounds is rel­uctant to talk up the prospects too much, it reflects the fact that many investment banks got their fingers burnt in 2010, hiring aggressively in expectation of a big year that in many respects disappointed.

After a record year in 2009 as corporate Australia, coming out of the financial crisis, rushed to raise money, the pace of equity capital issuance slumped in 2010, down $38 billion to $21 billion.

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Mergers and acquisitions were much healthier, with market activity topping $110 billion in 2010 – almost double 2009 – thanks to a strong run into the end of the year, with $50 billion of transactions announced in the December quarter.

In a final fiscal quarter burst that included the $4 billion float of the Queensland government’s QR Rail network, initial public offerings reached $8.4 billion, well above 2009’s $2.1 billion.

“What happened in 2009 was that we had these extensive recapitalisations," UBS co-head of investment banking Guy Fowler said.

“I think what happened with a lot of the other banks is that they missed out on that and started hiring people in expectation it would continue in 2010. It wasn’t sustainable and we didn’t do it."

When activity did pick up in the December quarter UBS was in the thick of it, advising the ASX as it agreed to an $8.4 billion takeover from the Singapore exchange and guiding AMP as it finally won the $14.6 billion battle to buy out AXA Asia Pacific.

Outside the financial sector, it also arranged Royal Dutch Shell’s sell-down of a third of its stake in Woodside for $3.3 billion and had a hand in deals involving Brambles, Straits Resources and Tabcorp, among others.

Along with rivals Goldman Sachs, Merrill Lynch, Royal Bank of Scotland and Credit Suisse, UBS was a joint lead manager on the QR National float, which was the year’s biggest IPO.

While some market watchers claimed interest from retail investors in the float was muted, Mr Fowler described it as positive, especially since many mum and dad investors had been disappointed by the earlier IPOs of Myer and Kathmandu.

“On the back of [those], which weren’t that great for retail investors, for a stock to get about $1.5 billion from retail investors, it is not bad," he said.

“The upside has been from international demand, people in the US, Canada and Europe, whereas a lot of the locals are just saying it is too expensive."

UBS co-head of equities Robbie Vanderzeil said greater confidence in the global economy was behind the pick-up in corporate activity towards the end of 2010. “Asian markets, in particular, have been quite active and some of the IPOs have been quite successful and that has given investors some confidence," Mr Vanderzeil said.

He added that the high Australian dollar had curbed overseas investment into the local market in 2010 but that offshore investors had now adjusted to the inflated currency.

“It slowed down a bit as the Australian dollar went for a run, but people have now come to terms with the fact that the Australian dollar is around parity," he said.

Looking ahead, Mr Grounds said a key goal for UBS here was to lift its wealth management business to the heights reached by the investment bank.

Recently, UBS’s local wealth arm was granted greater autonomy from its Swiss parent and would now report directly to Mr Grounds. It previously reported to the Swiss bank’s global wealth chiefs.

Mr Grounds said it planned to make greater use of the UBS performance in investment banking to boost its wealth management business.

“Formerly, the wealth business was a bit of a global silo. The wealth management business does distribute a lot of investment banking products but we think we can do better at that," he said.